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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Appropriations to trading stock

Paragraph 10 Schedule 7A applies the pre-entry loss rules to elections under Section 161(3). If, in the absence of an election, there would be a pre-entry loss on an appropriation to trading stock, the loss which can be rolled over as a reduction in Case I profits is itself restricted by the amount of the pre-entry loss. The pre-entry loss remains in the capital gains regime, as a pre-entry loss of the company which appropriates the asset to trading stock, or of the company which is treated by Section 173(1) as appropriating the asset to trading stock.

EXAMPLE 1: APPROPRIATION TO TRADING STOCK - THE SINGLE COMPANY CASE

A company appropriates an asset with an unrealised capital loss to trading stock. The rules in Section 161(1) would produce an allowable loss £3M, by reference to a deemed market value disposal on the appropriation. The loss £3M would include a pre-entry loss £2M.

If there is an election under Section 161(3), the loss which can be rolled over to reduce the Case I profits is £1M (total loss £3M less pre-entry loss £2M). The Schedule 7A loss set-off restrictions apply as if a pre-entry loss £2M had accrued to the company at the time of the appropriation to trading stock.

EXAMPLE 2: APPROPRIATION TO TRADING STOCK - THE MULTIPLE COMPANY CASE

Company A transfers an asset to company B in the same group. The asset is trading stock in the hands of company B, but not company A. There is a no gain/no loss disposal from A to B. And B is treated as having appropriated the asset to trading stock. The effect of Section 161 would be that B makes a deemed market value disposal of the asset.

Assume that the deemed disposal would produce a loss £6M including a pre-entry loss £4M.

If B makes an election under Section 161(3), the loss which can be rolled over to reduce B’s Case I profits is £2M (total loss £6M less pre-entry loss £4M). The Schedule 7A loss set-off restrictions apply as if a pre-entry loss £4M had accrued to company B at the time of the appropriation to trading stock.

Note: Additional rules relating to loss buying were enacted in FA 2006. See CG47020+ for guidance on the rules which apply in priority to TCGA92/SCH7A for accounting periods ending on or after 5 December 2005.

FA11/S46 and FA11/SCH11 greatly simplified the rules in TCGA92/SCH7A for the deduction of losses on or after 19 July 2011. See CG47400+ for guidance on loss streaming from that date.